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    Question

    Which of the following ratios measures the banking

    sector’s ability to absorb shocks arising from financial and economic stress?
    A Liquidity Coverage Ratio Correct Answer Incorrect Answer
    B Net Stable Funding Ratio Correct Answer Incorrect Answer
    C Capital Adequacy Ratio (CAR) Correct Answer Incorrect Answer
    D Leverage Ratio Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    The Capital Adequacy Ratio (CAR), also called the Capital to Risk-Weighted Assets Ratio (CRAR), measures a bank’s capital in relation to its risk-weighted assets. • It reflects the buffer available with banks to absorb potential losses and continue operations in times of financial or economic stress. • Formula: • CAR=Tier I Capital + Tier II Capital / Risk Weighted Assets  • Higher CAR → stronger ability of banks to withstand shocks. • RBI mandates minimum CAR levels in line with Basel norms to maintain financial stability. Thus, CAR is the key ratio that indicates the resilience of banks against risks.

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